Mohammad Zia M. Qureshi , Senior Adviser, Office of Senior Vice President and Chief Economist, World Bank

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Financial crisis: private capital flows to developing countries are in steep decline

• Net private capital flows to developing countries will likely turn negative in 2009―a more than $700 billion drop from 2007 peak

Net private capital flows to developing countries

600

700

800

US$ (billions)

2

billion drop from 2007 peak

• Estimates of the financing gap of developing countries in 2009 reach as high as $1 trillion

-100

0

100

200

300

400

500

1991-2001

2002 2003 2004 2005 2006 2007 2008 2009

Real crisis: economic growth in developing countries is plummeting

• Severest crisis since the Great Depression.

• World output to fall by 1.3% in 2009.

• Developing country growth will fall to 1.6% in 2009―only a

GDP Growth (%)

6

8

10

3

fall to 1.6% in 2009―only a quarter of precrisis projection. Growth will be 1.7% in Sub-Saharan Africa and negative in Europe & Central Asia and Latin America & the Caribbean.

• Per capita income will fall in more than 60 developing countries.

Note: * Indicates a projection.

-6

-4

-2

0

2

4

2002 2003 2004 2005 2006 2007 2008 2009* 2010*

World Advanced Economies

Developing Countries Sub-Saharan Africa

No developing region is immune from crisis impactHigh vulnerabilities in both middle- and low-income countries

4

Human crisis: poverty is rising in many countries

• Growth slowdown will trap 55-90 million more people in poverty in 2009

• Number of poor people will rise in more than half of all developing countries, two-thirds of low-income countries, and three-quarters of countries in Sub-Saharan Africa

• Food crisis is not over; it will continue to trap up to 100 million people in poverty in 2009

Percent of countries experiencing a rise in poverty in 2009

5Note: Based on a poverty line of $1.25/day in 2005 PPP.

Percent of countries experiencing a rise in poverty in 2009

27 26 21

5466

77

0102030405060708090

Developing countries Low-income countries Sub-Saharan Africa

Percent

Rise in poverty rate Rise in poverty headcount

Growth collapses are costly for human development outcomes

• Food crisis caused the number of hungry people in developing countries to rise from 850 million in 2007 to 960 million in 2008. The economic slowdown will raise this number past 1 billion in 2009.

• Infant deaths could be 200,000 to 400,000 higher per year on

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• Infant deaths could be 200,000 to 400,000 higher per year on average for next several years.

• School enrollments will suffer―especially for girls. In Indonesia, the number of children aged 7-12 years in rural areas not enrolled in school doubled in a few years after the 1997 crisis.

• Such setbacks in nutrition, health, and education can have serious irreversible effects on human development outcomes.

Implications for MDGs: the goals, many already in jeopardy, face serious further setbacks

• Most human development MDGs are unlikely to be achieved on current trends; prospects are gravest in health

• Sub-Saharan Africa is falling short on all MDGs• South Asia lags on all human development MDGs. Achievement of

the poverty reduction goal also is now threatened

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Most countries are falling short of most MDGs

• At country level, a majority of developing countries are at risk of missing most of the MDGs

8

Responding to a development emergency: priorities for action

• Ensure an adequate fiscal response to support growth and protect the poor―consistent with maintenance of macroeconomic stability

• Improve the climate for recovery in private investment―including paying special attention to strengthening financial systems

• Redouble efforts toward the human development goals―including

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• Redouble efforts toward the human development goals―including leveraging the private sector role

• Scale up aid to poor and vulnerable countries

• Maintain an open trade and finance system―including quick action on the Doha Round

• Ensure that the multilateral system has the mandate, resources, and instruments to support an effective global response to the global crisis

High global excess capacity: even if growth returns, GDP will remain below potential

Output gap (difference between actual and potential GDP) as % of potential GDP

2

4

6

Developing

10

-8

-6

-4

-2

0

1970 1975 1980 1985 1990 1995 2000 05 1009 10 11

Record levels of spare capacity

High-income

Avoiding a protracted recession calls for a globally coordinated fiscal stimulus ―in both

developed and developing countries

• Developing countries’ fiscal needs are rising but fiscal space is narrowing―fiscal positions will weaken on average by more than 2% of GDP in 2009

Deterioration in developing countryfiscal balances, 2009

-1

0

Percent of GDP

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• Expenditure priorities include social safety nets and infrastructure

• Enabling an adequate fiscal response in developing countries through appropriate financing will be a win-win for all

• Fiscal response needs to be tailored to country circumstances

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-5

-4

-3

-2

Middle East & North Africa

South Asia Latin America & Caribbean

East Asia & Pacific

Sub-Saharan

Africa

Europe & Central Asia

External financing from official sources will need to rise substantially

• Developing countries face large external financing gaps in 2009, as private flows will fall well short of financing needs

-50

ECA LAC SSA SAS EAP MNA

-50

ECA LAC SSA SAS EAP MNA

12ECA=Europe & Central Asia; LAC=Latin America & Caribbean; SSA=Sub-Saharan Africa; SAS=South Asia; EAP=East Asia & Pacific; MNA=Middle East & North Africa.

-450

-350

-250

-150

US$ (billions)

Low case

Base case

-450

-350

-250

-150

US$ (billions)

Short-term debt due

Long-term debt due

Current account

External financing needs External financing gaps

Access to finance and infrastructure and quality of business regulation are key determinants of

private investment climate

• Firms in LICs report access to infrastructure and finance as top

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finance as top constraints

• Firms in MICs report regulations and governance as key factors

Infrastructure investment: a win-win-win

• Win #1: contribute to economic recovery; highest multiplier effect• Win #2: remove bottlenecks to future growth• Win #3: contribute to a “green” recovery―energy-efficient infrastructure

Infrastructure investment by funding source

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• Private sector role in infrastructure investment is significant but needs support in current credit crunch

Average for 2000-05

Private Sector 22%

Official Development Assistance8%

Governments or Public Utilities 70%

Infrastructure needs are large ―but more financing is only part of the answer

• Infrastructure spending in developing countries is only half of estimated annual need of $900 billion (7-9% of GDP)

Closing the infrastructure financing gap in Sub-Saharan Africa

US$ (billions) annually

Financing gap +40

Reallocate spending across

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• Infrastructure financing gap in Africa is $40 billion annually– but it can be reduced by

45% through improved management, efficiency, and cost recovery

Reallocate spending across categories –8

Raise capital budget execution –3

Reduce operating inefficiencies –3

Improve cost recovery –4

Remaining gap +22

Progress toward human development MDGs must be accelerated

• Major shortfalls in human development MDGs, especially in health in Sub-Saharan Africa

• Need to reinforce key public programs in health and education―control of major diseases, health system strengthening, FTI, social protection

Sub-Saharan Africa: widening gap between target and actual MDG paths

Under-5 mortality rate Maternal mortality rate

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Leverage private sector role in human development

• In Africa and South Asia, half of MDG-related maternal and child health services are privately provided; in South Asia, 30% of primary and secondary education is delivered by private institutions

• There is potential for greater private sector contributions to financing and delivery of services

Private sector share of diarrhea treatment Private enrollment share by region, 2006

Niger 2006Malaw i 2004

Mozambique 2003

170 20 40 60 80 100

Indonesia 2002India 2005

Cameroon 2004Vietnam 2002

Cambodia 2005Nigeria 2003Kenya 2003Chad 2004Benin 2001

Guinea 2005Bangladesh 2004

Nepal 2006Ghana 2003

Tanzania 2004Burkina Faso 2003

Zambia 2001Uganda 2006

Mali 2001Rw anda 2005

Madagascar 2003Ethiopia 2005

Niger 2006

Percent

Private Formal Private Informal Public

The crisis increases the urgency of scaling up aid

• Despite an increase in 2008, total aid and aid to Africa are short of Gleneagles targets for 2010 by $29 billion and $20 billion, respectively. Need to expedite delivery on these commitments.

• Indeed, the crisis calls for going beyond existing commitments.• Progress on Accra Agenda for Action to improve aid effectiveness also

needs to be expedited.

DAC members’ net ODA 1990-2008

18

Note: 2008 data are preliminary.

Private aid: an increasingly important partner in development

• OECD estimates private international giving―by foundations, corporations, CSOs―at $18.6 billion in 2007

• Alternative, more comprehensive estimates place private international aid from U.S. alone at $36.9 billion

Private grants: undercounting philanthropy

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Rising pressures for trade and financial protectionism must be resisted

• Firm resolve is needed to follow through on renewed G-20 promise to avoid trade protectionism― given that a majority of G-20 members did not adhere to their November 2008 commitment

Largest post-war decline in world trade

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November 2008 commitment

• Timely recent initiatives to counter the squeeze in trade financing

• Need to avoid a retreat into financial protectionism―especially measures that constrain capital flows to developing countries

Scope for trade reform remains large ―especially in agriculture

• Agricultural protectionism – a taproot of global food crisis• Crucial importance of quick, successful conclusion to Doha Round

Overall trade restrictiveness index, 2007

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International financial institutions must have adequate resources for crisis response

• IFIs have a key role in bridging the large financing gap now faced by developing countries

• Recent G-20 decisions are an important step in equipping IFIs with the necessary resources

IMF

• Tripling of available resources to $750 billion• SDR allocation equivalent to $250 billion

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IMF• SDR allocation equivalent to $250 billion• A new Flexible Credit Line• Doubling of concessional lending capacity

World Bank Group

• Near tripling of IBRD lending to $100 billion over next 3 years• Fast-tracking of commitments within IDA15 total of $42 billion• Scaled-up private sector support from IFC and MIGA• WBG crisis response has three priorities: social safety nets; infrastructure; and support to private sector, especially SMEs• Further review of financial capacity, including capital adequacy

www.worldbank.org/gmr2009

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